Reality is Weighing on Small Business Optimism

business optimism

Small business owners are an optimistic lot, with studies showing that they tend to have a rosier outlook than other people. Yet four years into the economic recovery, surveys show them in a relative funk.

What gives?

It’s pretty simply, really. Small business owners’ relative pessimism reflects reality. Despite an economy that has been expanding since mid-2009, conditions remain relatively poor for the typical small business owner.

Let’s start with small business owners’ attitudes. The most recent Wells Fargo Small Business Index clocked in at 16 in April. While that’s higher than the -1 it recorded in the second quarter of 2009, when the economy was pulling out of the worst economic downturn since the Great Depression, the Index remains far below the 99 it recorded in the fourth quarter of 2007 before the Great Recession began.

Other indices are also below their pre-recession levels. The longest running measure – the Small Business Optimism Index from the National Federation of Independent Business – was at 97.3 in March of 2007. In March of 2013, it was at 89.5.

As much as small business owners try to see the bright side, many measures show that small business owners are worse off today than they were at the end of 2007. Consider the following:

  • Fewer small businesses are doing well financially. Approximately, 58 percent of small business owners told surveyors from Wells Fargo that their company’s financial situation was “good” in April. While that’s better than the 50 percent who said it was good in the first quarter of 2009 when the economy was still in recession, it is lower than the 72 percent who reported it as good in the fourth quarter of 2007 before the economic downturn hit.
  • Small business owners face concerns about their cash flow. Fifty-nine percent of small business owners told interviewers from the American Express Open Small Business Monitor that they had cash flow concerns, ten percentage points higher than the 49 percent who described having cash flow problems in September 2007.
  • Revenues remain soft. In April only 37 percent of small business owners told Wells Fargo’s surveyors that their business’s revenue rose of the prior 12 months. In the first quarter of 2007, 45 percent of small business owners said their revenue had gone up over the previous 12 months.
  • Employment is down. In April the Intuit Small Business Employment Index was 4.9 percent below its December 2007 level, indicating over 1 million fewer people employed by companies with fewer than 20 workers now than before the Great Recession.
  • Households hold less equity in private companies. Data from the Federal Reserve of New York’s Quarterly Report on Household Credit shows that in the fourth quarter of 2007 households held 17 percent less equity in non-corporate businesses than they did in the fourth quarter of 2007.
  • Fewer Americans are in business for themselves. According to Bureau of Labor Statistics data, the percentage of the civilian non-institutionalized population that was self-employed dropped from 7.0 percent in March 2007 to 5.9 percent in March 2013.

Given the numbers, I am surprised at how positive the small business confidence measures are. It’s testimony to the optimistic nature of small business owners that their views are this upbeat.

Reality Check Photo via Shutterstock

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

6 Reactions
  1. This is true on both fronts: SMB owners are pretty dang optimistic, but the reality of the economy is making it hard for even the optimist to be very excited.

    SMB owners are good weather vanes of the economy because they’re very close to both customers and the company finances. This level of understanding can’t be replicated at bigger firms.

  2. A true entrepreneur will find the ray of sunshine in every storm. It is just the makeup of the optimistic mindset. An entrepreneur’s failure to succeed does not create a long term departure from business. More so, it “sometimes” creates a temporary and well thought out recess to retool and to ultimately relaunch.

    An immediate positive that can come out of this is more information for small businesses on how to sustain in dipping economies. I suspect that even more how to’s in tough times will be published over the next 18 months.

    Case in point. An entrepreneurial mindset should not be abandoned at this time, but instead can and will help small business owners see their way through this slowly recovering drought.

  3. Being an entrepreneur, there are several mottos we follow. “If there’s a will, there’s a way.” “As long as there’s a demand, there will be a solution, to fill it.” “Freedom is better than tyranny!”

    The new entrepreneurs/small business owners are springing up, because they could not find a job out there, so they create one. They are more optimistic at handling their own destinies, than letting other dictate their incomes.

  4. There are many small steps that organizations can take to improve their cash flow. From identifying ways to save on operations costs (office supplies, utilities, etc) to implementing debt collection policies to make sure that all outgoing invoices are being returned with payment on time. You can even export your financial data from your bookkeeping solution such as QuickBooks to forecast your cash flow for the next six weeks, which can help you make better business decisions.

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